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Consumers Have Increased Borrowing At the Fastest Rate Since 2000

by Peter Renton on July 27, 2012

Change in Borrower Volume Since 2000 from Prosper.com

This week Prosper released their June 2012 Investor Monthly Update. This is the second update in the series (the May update is here) that provides interesting information not just on the performance of the Prosper investor portfolio but also some macroeconomic data as well.

Written by Joseph Toms, Chief Investment Officer at Prosper, this month’s report details the news about the recent increase in consumer borrowing. Based on data released by the Federal Reserve as the above chart shows consumers are borrowing at the fastest rate in over a decade.

Good News or Bad News for P2P Investors?

Bloomberg and Fox Business News covered this recent increase in consumer borrowing when this data was released earlier this month. Their take was that this is not a good thing for the economy because people are finding it difficult to make ends meet and are borrowing to make up the shortfall.

Toms has a different perspective and he questions the interpretation of this data. Here is what he says about the increase in borrowing:

The large majority of consumers remain employed. We think that the draw on consumer credit lines instead reflects a growing comfort that, while the economy may not be booming, the worst has passed, resulting in increased spending, a positive economic sign.  Consider the fact that while hiring has remained extremely sluggish by past standards, the unemployment rate, which is currently at 8.2%, remains reasonably stagnant. In other words, the employed are not losing their jobs.

I am not an economist so I really don’t know which interpretation is more accurate. I suspect, though, a robust lending environment and a growing economy is good for both Prosper and Lending Club. While the majority of loans on both platforms are for debt consolidation many loans are for new purchases. As investors we want these people to continue to borrow money that is within their means.

The other interesting piece from this monthly report is that Prosper updated their seasoned returns number. Loans issued from July 2009 through August 2011 (seasoned loans have to be at least 10 months old) are generating a return of 10.02% for investors on average. This number is pretty much steady from the last update that had returns at 10.06% although that number is down a little from the high of 10.69% that was reported last year.

You can checkout the full PDF of the June report here. And let me know what you think in the comments.

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